Williamson, Claudia R., Journal of Private Enterprise
This paper attempts to answer two important questions in economics. First, what virtues are important for promoting economic progress? Second, what is the source of these virtues? To answer these questions, I rely on recent studies suggesting that the virtues of trustworthiness, tolerance and respect, and individual determination are important for understanding how civil society supports economic prosperity. Specifically, trust, respect, and individual motivation encourage and support economic freedom. I also explore competing explanations for the determinants of virtues including religion, the role of government, and the act of economic exchange for civilizing society. My analysis finds support for the latter source.
JEL Codes: O17, Z10
Keywords: Virtues; Institutions; Development; Trust; Social capital; Culture
The link between economic institutions, such as well-defined and secure property rights and the rule of law, and economic development is well documented in the literature (Montesquieu, 1748; Smith, 1776; Demsetz, 1967; Hayek, 1960; Bauer, 2000, North, 1990, 2005; Keefer and Knack, 1997; Rodrik et al, 2004; Acemoglu and Johnson, 2005). North (1990, 2005) argues that institutions provide the rules of the game that structure political, economic, and social interaction. These constraints provide the incentives and information to facilitate production and exchange, investment, technological innovation, and entrepreneurship that are necessary for economic development. The empirical research supports this positive causal relationship between the institutions supporting economic freedom and prosperity (Gwartney et al.,1999; Acemoglu et al., 2001, 2002; Cole, 2003). Rodrik et al. (2004) summarize this robust finding as "Institutions Rule."
More recently, economists have been pinpointing specific institutions that are important for economic development. An outgrowth of this research is to separate institutions into their formal (government provided and enforced) and their informal (privately provided and enforced) components. An emerging result supports the importance of informal constraints in promoting economic development through its effectiveness in defining and enforcing rules that promote secure property rights, exchange, and the observance of contracts (Anderson and Hill, 1979; Benson, 1989a, 1989b; Greif, 1993; Greif et al., 1994; Stringham, 2002, 2003; Nenova and Hartford, 2004; Acemoglu and Johnson, 2005; Leeson, 2007a,b; Tabellini, 2007; Williamson, 2009). These constraints stem from social norms, culture, customs, and traditions. Thus, a society's virtues are at the core of any institutional arrangement and the subsequent incentive and information structure that is formed to guide social and economic behavior.
This paper attempts to understand more specifically the influence that virtues exhibit on economic development. My conjecture is that virtues promote social cooperation by reducing transaction costs and the costs of monitoring, generating commonalities and focal points, and creating broad rules to guide behavior leading to more economic exchange and production, higher investment, and more entrepreneurship. These interactions form the core or "institutional glue" necessary for the economic institutions supporting a free and prosperous society to be effective.1
My approach is twofold. I focus on addressing two important questions. First, which virtues promote economic freedom and development? Second, can we identify determinants of these specific virtues? To answer these questions, I rely on analysis provided in the economics literature including theoretical, conceptual, and empirical studies. My analysis is a natural extension of the institutional literature and centers on understanding how virtues help to form the necessary constraints that promote economic freedom and development.
Instead of focusing on traditional virtues such as justice, prudence, and love, as discussed by McCloskey (2006), for example, my analysis attempts to complement such studies by centering on virtues directly supporting economic exchange and production, entrepreneurial activities, and the provision of public goods. …